Bank of Japan, Last Holdout of “Free Money,” Begins to Tighten: Raises Cap of 10-Year Yield Peg, Paves Way for NIRP Exit

Yen & 10-year yield spiked. BOJ cited dysfunction in bond market, didn’t mention elephants in room: raging inflation & yen’s plunge.

By Wolf Richter for WOLF STREET.

The Bank of Japan announced today that it would widen the band of its yield peg that kept the 10-year yield capped at around 0.25%. It raised the upper limit of the yield peg to 0.5%, from 0.25%. At the same time, it left its short-term policy rate unchanged in the negative, at -0.1%.

The BOJ is the last central bank still hung up on the NIRP absurdity. Even the ECB has been hiking rates as it is dealing with a horrible surge in inflation.

This move by the BOJ opened the door for rate hikes to end its negative interest-rate policy, exit its ultra-loose monetary policy, and join the biggest global tightening cycle in 40 years to fight the worst inflation in 40 years. But that’s not what the BOJ said.

To rationalize the move, the BOJ cited the “deterioration in the Japan’s bond market functioning,” and the “arbitrage relationships between the spot and futures markets,” because the yields of Japanese Government Bonds (JGBs) are “reference rates for corporate bond yields, bank lending rates, and other funding rates.”

But the JGB market disfunction isn’t new. There hasn’t been much of a JGB market for years, with the BOJ holding over half of all JGBs, and with government-controlled institutions holding large JGB positions as well.

The 10-year JGB yield jumped 19 basis points upon the announcement, from about 0.24% to 0.43% and then edged down to 0.39%. It seems the JGB market is not all that dysfunctional after all:

But what’s new in 2022?

The yen’s plunge and inflation. And the BOJ didn’t cite either one of them. But hiking rates will address both.

The yen jumped 4% against the US dollar upon the announcement, to 131 yen to the USD. A gigantic move for major currency in one day.

The yen had gotten beaten down into September this year, when the Fed’s rate hikes collided with the BOJ’s obstinate refusal to exit its negative interest rate policy and yield peg, despite inflation that began to rage.

To prop up the yen, the BOJ started intervening in the currency market in September, selling dollars for yen. It got the dollars by selling US-dollar denominated assets, including US Treasury securities. Over the three months through October, the latest data available from the US Treasury Department, Japan’s holdings of Treasury securities dropped by $121 billion, to $1.08 trillion, and were down by $242 billion from a year earlier. It could have just exited the yield peg and started raising short-term rates earlier this year:

Inflation has begun to rage. Japan’s “core” Consumer Price Index for all items less fresh food – which the BOJ uses for its inflation targeting – jumped by 0.6% in October from September, the worst month-to-month jump since the consumption tax hike in April 2014; and beyond that, since May 2008; and beyond that, since the consumption tax hike in April 1997.

The November CPI data will be released in two days; maybe another bad surprise that the BOJ is preparing for by raising the cap of the yield peg to pave the way for actual rate hikes.

On a year-over-year basis, “core” CPI jumped to 3.6%, the worst since 1982. Even the consumption-tax-hikes couldn’t accomplish that. It shot through the BOJ’s 2% target in April:

The BOJ has already made other moves to tighten policy.

Total assets on its balance sheet have declined by over 5% from the peak in April.

And over the weekend, it was reported that the Japanese government and the BOJ were weighing changes to their agreement, dating back to the beginning of Abenomics in 2012, which started the crazed QE by the BOJ. Those changes would be worked out with the new BOJ governor after Kuroda departs in April when his term ends.

Kuroda is the architect of the crazed QE and interest rate repression that was part of Abenomics. And not a lot of changes can happen with him still at the helm, so the raising of the yield peg by 25 basis points was quite a step – and big surprise for the markets as you can see from the reaction in the currency market and the bond markets.

It now seems likely that the BOJ, once under a new governor, will do a monetary review, out of which will come a new policy arrangement that does away with the Abenomics-dictum of QE-and-0%-rates-at-all-costs and prioritizes keeping inflation under control, thereby officially joining the global tightening cycle.

Implications for yields in the US and elsewhere.

Japan was the last holdout for ultra-low global funding costs – the last “free money” — after the “free money” has vanished from other central banks when they started hiking their policy rates. By allowing the 10-year JGB yield to drift higher, the BOJ is beginning to very gingerly step away from this role.  And so the last source  of “free money” begins to dry up.

In response, the US Treasury 10-year yield jumped by 10 basis points to 3.69% at the moment, and the German 10-year yield also jumped by 10 basis points to 2.30%.

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  65 comments for “Bank of Japan, Last Holdout of “Free Money,” Begins to Tighten: Raises Cap of 10-Year Yield Peg, Paves Way for NIRP Exit

  1. Lune says:

    Wonder what this will do to the yen carry trade. Ms Watanabe might start bringing her Yen home if she can finally get a decent yield. This will add another source of global asset deflation.

    (Or, if the markets move too fast, it could be a worst case scenario of the Yen rebounding rapidly, which bankrupts the carry trade players, necessitating some sort of bailout).

    • Minutes says:

      0.4% is not blowing up Mrs. Watanabe’s skirt too much me thinks. Repatriation is going to take a spicier meatball than that.

      • Leo says:

        Exactly, too much advertisement for a drop in the ocean.

        Japan has a rapidly aging population with no immigration to bring in youth or sustain population. Couple that with highly distorted markets, and it’s a recipe for ……

        • dokjat says:

          Sounds like you may not have been to Japan. Lots of immigration into Japan over the past 5 years or so. My wife was there several weeks ago, and she found a lot more foreigners working in shops, hotels, etc. Whether the pace of foreign worker inflows into Japan are large enough is a separate question

      • Wolf Richter says:

        The Fed raised 25 basis points in March 2022, and so what, no biggie no sweat, the Fed is trapped, can’t raise further, will restart QE in August, etc. And now we’re at 4.5% and heading north of 5%, and markets have tanked. Central banks have a word for this initial little-bitty move: “liftoff.”

  2. rojogrande says:

    Kuroda must have signed off on this. I wonder if he’s getting religion with the spike in inflation, or realizes he’ll soon be gone and policy will change so there’s no point in being an obstructionist? Perhaps the JGB can now do some other constructive things before Kuroda’s term ends in April.

  3. Brewski says:

    Central bank “groupthink” shifts away from super easy money (negative nominal and real interest rates) to a more realistic policy.

    Japan capitulates as their inflation rebounds.

    Prepare for a roller coaster ride on the yield curve.


  4. Djreef says:

    OK, so quick question Wolf since you know infinitely more about the Japanese situation than I do.

    What happens if Japan can’t raise rates without breaking something major? I mean what if Japan truly is trapped by it’s own negative interest rate policy. What then?

    • Wolf Richter says:

      I’m just really really really tired of this song and dance about central banks being “trapped” and “cannot afford” and “break something big” after seeing it constantly promoted by these Wall Street crybabies that are losing their shirts.

      “SOMETHING BIG” has already broken. The biggest thing in over 40 years to break is INFLATION. It’s killing the currency. And central banks are belatedly trying to stop it. People need to get a grip on this.

      • Andy says:

        Well, do you want interest rates to be higher or lower then?
        And if so, at who’s expense?

        • Wolf Richter says:

          They need to go higher; short-term rates need to go above the rate of inflation. Long-term rates need to go well above the rate of inflation.

          This process is slow but it is happening whether I want it or not. I don’t push the buttons. I cannot make anything happen. But that’s what is happening. And it’s at the expense of asset prices. And I’ve been telling you this since early 2021. This is nothing new here.

        • Prairie Rider says:

          Thank you Wolf. Your first paragraph is a succinct summation of the Two Rules of Money

          1) Money must have value.
          2) Future money must have more value than present time money.

        • Tyler says:

          That’s easy, we want them to go higher, much higher. At the expense of the speculators/gamblers.

      • Tom S. says:

        It’s been so long since meaningful inflation I still am hearing people say that inflation isn’t bad, that they aren’t noticing it, etc.

        • josap says:

          Inflation hurts those at the lowest levels first. If you are upper middle class you don’t feel anything yet.

          Sure, there are complaints about the value of your stocks, maybe the value of your house dropped. But you can still buy all the groceries you want, pay all your bills, school tuition isn’t a big deal. Inflation? What inflation?

      • Depth Charge says:

        You and me both. I file it under “fake news.” All of these fearmongers are talking their books. They are wailing like a rival narco in a warehouse torture chamber because they didn’t prepare for the “FED pivot” to higher rates.

    • Lune says:

      “breaking something major” should really be translated to “whose ox will be gored? And will the Fed stop before *my* ox gets gored?” Because that’s what people are really asking.

      No one in power cared when low interest policies “broke” the housing market to the point where youngsters have to live in their parents’ basements even if they have a decent job. Because if you already have a house, that’s not your ox. But when house prices drop and finally become affordable to renters, at the expense of homeowners losing their life savings, that becomes “breaking something major” since, well, now it’s the homeowners’ ox being gored (and they have political power)?

      • Daisy says:

        Lune is right.

      • Depth Charge says:

        See: “Mr. Wonderful” Kevin O’Leary’s latest media wailshow after getting taken to the cleaners by Sam BankFried. A more disgusting display of tone-deaf narcissism would be hard to find. Hey Kevin – STFU and save us the drama.

      • KGC says:

        For something really funny watch Jim Cramer arguing that the FED needs to lower wages.

        Of course, he fails to point out that inflation actually does decrease the buying power of the wages earned (a DeFacto lower wage), so maybe the FED can get an endorsement from Cramer on just how effective it’s policies over the past 4 years have been.

        • Flea says:

          Cramer can lower his pay voluntarily, but that will never happen it’s only for other people .All these rich are playing same game screw the little people not them . He bought a farm with crypto winnings at least he was smart enough to get out

      • Lawefa says:


        Its interesting that some youngsters living in parents basements is at least a contributing factor to the current inflation being sustained because some of those aren’t living in reality not paying rent, utilities, and even food and using that expendable income to buy “wants” rather than needs to sustain inflation. Not point a finger. Just stating how out of wack this thing has got with housing affordablity, inflation, and getting things under control. Ultimately, this was the Feds fault that has created this mess though and I don’t see an easy way out of it. Would like to have seen them raise these rates more aggressively to date. Its hot talk right now from the Fed Reserve but feels like efforts too slow and too late at this point.

  5. ZagrebZagreb says:

    I’m looking forward to even more pictures in the press of traders holding their heads in their hands on the floor of exchanges, or looking at computer screens worryingly.

    I guess the idea being that we need to “do something!” to help these poor souls. Awww. Maybe some more free money?

  6. Andy says:

    It’s hard to say “raging inflation” when it’s not historically outrageous, and it’s less than most of the rest of the world, especially after following a global pandemic.
    BoJ is simply working with different priorities than the rest of the world.
    For one, the japanese really like their job security.

    • Wolf Richter says:

      Japan’s “core” Consumer Price Index jumped by 0.6% in October from September = 7.4% annualized = “raging.”

      The year-over-year core inflation rate was the highest in 40 years. It has started to rage in recent months, not all year, so the year-over-year will shoot higher.

      Japan had something resembling true price stability for two decades. And now prices are starting to blow out. That’s a shock to the economy.

      Kuroda has turned out to be totally tone-deaf and is now despised by the Japanese people.

      • Cas127 says:

        True price stability

        CB translation = Too little inflation!!! = Horrific Nightmare of Deflation!!! (er, why is deflation supposed to be a nightmare again?)

        Just recently happened to see that “Zimbabwe Ben” Bernanke has penned at least 3 books since 2009.

        Presumably trying to salvage doomed historical reputation before his name becomes a synonym for excrement.

        Too late, Zimbabwe…far, far too late.

    • RH says:

      We must view inflation measures with a pound of salt, all of them, because the governments and banksters have had major motivations to understate inflation to inflate away their debts. Japan’s government also has debt problems, e.g., see the story on statistica as to its national debt.

      The modest, banksters’ Fed, rate increases (to pretend to attempt to control US inflation, which is inflating away the banksters’ and their ultrarich cronies’ debts) means that bond investors will prefer US treasuries to Japan’s bonds or stocks. That applies to all nations’ bonds and stocks, unless they raise their interest rates more, particularly due to the increased default risks because they must pay for their imports with US dollars.

      I love how the recent presitator of a certain country just went to the Saudis to get them to accept his IOUs (“yuan), which he has been printing with abandon per statistica and other sources and will soon need to print more of to deal with his empire’s gigantic debts and the collapse of its real estate developers, which would mean that the Saudis were bailing out his empire. They said no thank you. How unkind! LOL

      • Sams says:

        Part of the reason China have expanded the monetary supply is to keep up with the USA to not have their currency appreciate relative the US dollar.

        As for the Saudis, they accept Remibris, because a lot of the stuff they buy are made in China and bought with Remimbris.

        And as oil is traded with goods with China, the currency make no big difference, how the setlement is done matter more. SWIFT or an alternative.

  7. Michael Engel says:

    Japan is 40% elderly. China opened it’s borders to to Japan, exporting
    health problems to the elderly, in the year of the Rabbit.

  8. mustangemely says:

    It looks like this announcement lit a fire under gold and silver, a falling USD might kick start the santa claus rally.

  9. SoCalBeachDude says:

    Why aren’t interest rates in Japan not already running at 10% or more?

  10. Yancey Ward says:

    But that cap is still at 50 basis points. That is still very, very low compared the BoJ’s peers. They either have much further to go, or this was a stop-gap measure.

    • Wolf Richter says:

      Central banks have a word for this: “liftoff.”

      The Fed’s liftoff was in March, when it raised the top of its range to 0.5%. Now it’s 4.5% and markets have tanked.

  11. Carlos Leiro says:

    off Toppic
    Tesla can enter in your list implossion stock?
    Sorry by my bad english
    the best for all

    • Ed7 says:

      Boy, did Elon Musk ever pull the curtain back on his own self the last few months.

      It’s hard to see the bottom in the medium term. The companies chasing Tesla in the EV market have very deep pockets, are driven in some cases by existential fear, and some of them are national champions to boot.

      (Musk is to be admired for upending the market as he’s done, but the challenges don’t get easier for Tesla.)

      • carlos leiro says:

        Elon Musk is showing that a large number of his products are selling smoke?
        It has not passed autonomous driving level 2 (maximum 5) when it has been announcing that it has already had it since 2014.
        The CyberTruck is unknown was announced in 2017
        The Semi Truck was presented in 2017 and promised in 2019, it was finally presented this year, but it was not said how many units there are.
        The Hiperloop came to nothing and the underground highways ended up being something not very respectable, Teslas with drivers that make a closed trip at 30 or 50 miles per hour when they had promised that they would go at least 100 miles.
        In Space X if you have renewed the question

    • Wolf Richter says:

      Not yet. But getting closer. You will certainly read about it here when it does. I’m already working on a title, LOL.

      This will #2 of the big stocks. Meta was #1.

  12. Gen Z says:

    The free money is definitely coming to an end for sure. What irks me is that interest rates are still lower than inflation, so regardless it’s not enough to combat it.

    A -0.1% off 9% inflation isn’t pivot worthy, but the Wall Street speculators want that pivot.

  13. Cytotoxic says:

    Half-tempted to say that I called a story for Wolf! But I’m sure he would have seen it even if I hadn’t mentioned it.

    Here’s another story of interest that I’m not sure Wolf will have seen: apparently Sri Lanka will be using the Indian Rupee for international trade. I think this is a bigger deal than its degree of reporting reflects. We are about to see a lot of crap get burnt. Ghana just defaulted on external debt. Maybe we’re going to see a lot of extraneous lousy currencies stop existing? Or accept a lower form of existence? Ecuador and El Salvador already use the USD. That kind of culling is good for crypto so no reason it won’t be good for everything.

    • Augustus Frost says:

      Do you have evidence that use of these developing world currencies is being replaced by crypto? Or is it just on your Christmas wish list?

      I’m going to take the wild guess that it’s being displaced by USD currency notes.

      I’m confident there will be many more sovereign debt defaults. I’m also confident it will do nothing for crypto acceptance.

      • Cytotoxic says:

        Right now? No, crypto just isn’t where it needs to be. With time, it’s inevitable. Especially cryptos linked to gold. Double plus those that are truly private. Cardano is the one to watch.

        This kind of misses the point though: some of the most crypto-curious countries have been those without their own CBs/currencies ie no reason to worry about competitive money because they’ve already given up that fight!

  14. Michael Engel says:

    We don’t know what might happen next : US gov shut down, or
    wiping out million of Japanese elderly and China shutting down again.

  15. LordSunbeamTheThird says:

    The last source of easy money…
    However, the Japanese aren’t going to easily enter a wage price spiral because thats not how things work over there. None of the salary-men are going to leave for more money. So any adjustments are going to be at the very low end of paid work.
    My wife, in Sapporo, says petrol has gone up a lot. Food has always been expensive. Rents are going down though.
    The figures on government debt are hard to understand because the Japanese government include their pension obligations in the stated debt, whereas the UK government for example, does not. So its hard to see whether its like for like or not.
    I still see 30% of old Japanese, the most assiduous chronic savers in the history of the world probably, going through a stiff inheritance tax system over the next 30 years. I also read that the sums that the Japanese companies are sitting on because they have no investment opportunities are going to be raided to cover the costs of the new defense investments on the grounds that these companies are the ones being protected by new missile systems….
    As always its very hard to see whats going to happen with Japan.

  16. Michael Engel says:

    USD weekly might get support from the cloud and ma50. A Lazer beam
    is coming from Aug 13 2018 to Sept 3 2019 highs, parallel from Sept 24
    low. The beam is hot. The dollar is in. After a spring it might popup again,
    to escape the Lazer beam.

  17. Z33 says:

    Nike had net income over the last 3 months of $1.33bb…same time last year was $1.34bb so it dropped and that’s not accounting for inflation. Too much free money…their stock is up over 12% afterhours because of this.

  18. Michael Engel says:

    Wolf, is USD backing up to Mar 2020 high, before exceeding 2000, 2001 and
    2002 highs. Why.

    • The Real Tony says:

      They try to spike it on low volume and then the smart money comes in and shorts the U.S. dollar on record volume. The same money is also the ones who try to spike it on low volume before everyone piles in short. Like a penny stock pump and dump. The money pushes it higher on low volume then it tanks on record volume. That’s the future for the U.S. dollar. Then surest trade in 2023 is a total collapse of the U.S. dollar.

  19. Michael Engel says:

    Japan 1M is minus (-)0.18%. Gravity with US and Germany pull the 40Y up. If the 10Y in the middle rise Japan yield curve will no longer be a curve. It will be a straight line up.
    The BOJ have to lift the front end, but they can’t, because gov debt is so high.
    Raising US debt ceiling might become difficult with a new House.

    • Old school says:

      Regarding debt ceiling. I watched an hour long debate between two economic professors on Kitco. If you don’t want inflation you have to have a mechanism to restrain spending by politicians. When governments overspend they insist the central bank bail them out.

      A real debt ceiling could be the ticket to do it. but politicians will never vote for it. It’s all up to Powell now. He has the poor tool of the interest rate wrecking ball to bring inflation down. Expect politicians to blame everything on him when there is a crash landing.

  20. The Real Tony says:

    I hope their stock market plummets as they took a page from the U.S. stock market about 3 or 4 years ago and rigged their stock market upwards. Why can’t counties just leave their stock markets to free market forces?

    • Anthony A. says:

      “Why can’t counties just leave their stock markets to free market forces?”

      It’s easy money for the manipulators. Straight from the guy on the street’s account.

  21. BobbleheadLincoln says:

    If Powell does actually stick to his guns, you wont see a witch hunt from mainstream media for any broader recession or depression level pain. I don’t think the US mainstream media will abandon support for the Fed’s policy choices. All of the policies in the leadup over the past 11 years led to the greatest wealth concentration for the rich ever. They could never hate this guy or his team.

    That sort of blame would cause a major public move in favor of increased regulation of banking/finance on a broad scale. The current powers that place politicians in government and keep them there do not want that.

  22. Blam 35 says:

    Wolf has always been out front on fed “supposedly” not wanting mbs on its balance sheet but they won’t even shed them at miniscule 30 bil per month, wouldn’t selling them hard at 200-300 bil at whim reduce the wealth effect and aid in slowing inflation?

  23. BeeKeeper says:

    Wolf, a little correction on “To prop up the yen, the BOJ started intervening in the currency market in September, selling dollars for yen.” and “It could have just exited the yield peg and started raising short-term rates earlier this year”

    BOJ is not allowed to intervene directly on the FX markets. Interventions were done by the government, Ministry of Finance (MoF). MoF [master] issues order to sell and BOJ [slave] executes it. Foreign treasuries are owned by the government, BOJ executes the orders, but it’s not their intention to prop up the YEN. You make it sound like they could just raise rates instead of intervention, which is incorrect. BOJ have had no intention to raise rates nor to intervene, interventions were done by MoF.

    On the other note, it will take at least 4-6 month for BOJ to turn around and start raising rates. It’s a slow process, same as in US. Any upsides in JPY will be reversed in next 3 months. As I see it, interest in JGB is vanishing, and it’s quite hard for the BOJ to hold the peg (you can buy US treasuries with higher interest, why bother with Japan?). Yield peg to 0.5% just gives more briefing room to BOJ, they were forced by markets to do something.

    Otherwise, the article is again spot on. Just a little correction is needed.

  24. Marc Joffe says:

    If JGB rates normalize, Japan will have a major fiscal problem. Interest on the government’s massive debt will crowd out other categories of spending.

    • Wolf Richter says:

      The government can easily issue more debt, with higher yields, because at higher yields, there will be insatiable demand from investors. Can you imagine a 10-year JGB with a 5% yield? There would be huge demand, from everyone around the globe. Japanese investors and retirees would sell their foreign investments and invest in JGBs. The government could then issue a lot more at 5% and used the proceeds to pay for rising interest expense.

      Also, inflation is now spiking in Japan, which means government revenues will rise (including from the consumption tax), and the debt burden will get lighter. Core CPI is at 3.6% and heading straight up. With the 10-year yield still capped at 0.5%, the government is reducing its burden every day.

      Yield solves all demand problem. It’s yield repression that causes problems.

  25. Bobber says:

    There was a lady in the news the other day saying she lost over a million in FTX and was going to have a rough retirement if authorities don’t do something. The media presented it as though she was suffering through no fault of her own.

    Gees, the stupidity out there. Is the government responsible for every idiotic move to be committed, which results in loss? I’m afraid some people look at it that way.

  26. Dang says:

    Wow ! What a great, meticulous article that says what the data say. It stimulated me to shift my 2 mm deep focus from the big kahuna, the US, to an extremely important ally, Japan. While framing my flimsy understanding of the Japanese economy, in lite of the data you presented, I realized I also have to resist being intoxicated by Japan’s elegance and beauty and thinking there is an altruistic motivation behind the BOJ shifting gears.

    Reality suggests that there is an underlying philosophy behind their objective.

    Even we newcomers to the party, the naive US with a pitiful history of only several hundred years, know the much deeper cultures of the world frame the world in an eccentric manner according to their historical experience.

    • Dang says:

      I currently feel that the BOJ policy is a reactive response to the world wide recognition that monetary production is not the same as economic production. Eventually, funding the 100 year projects, currently required, becomes increasingly difficult with the scrip one has over issued.

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